Citing Amaranth, CT Attorney General Calls for More Fund Oversight

With more questions than answers surrounding Greenwich, CT-based Amaranth Advisors LLC's significant losses due to a slumping natural gas market, Connecticut Attorney General Richard Blumenthal reiterated Tuesday his long-standing call for more oversight of hedge funds in general.

Blumenthal said he is "collecting evidence and reviewing facts" concerning the large losses at Amaranth and renewed his call for "greater transparency and disclosure" in the hedge fund industry.

In a letter to investors, the fund, which has $7.5 billion in assets under management, said year-to-date losses might exceed 35% due to last week's plunge in natural gas prices (see Daily GPI, Sept. 19). That could put total losses at more than $2.625 billion. The news was eerily reminiscent of MotherRock's demise in early August (see Daily GPI, Aug. 4). Amaranth's rumored losses -- if confirmed -- are significantly greater. After less than two years of operation, energy hedge fund MotherRock LP said it was closing its doors following an alleged $200+ million loss in natural gas trading over June and July.

"We are collecting evidence and reviewing facts relevant to recent hedge fund losses," Blumenthal said. "Particularly problematic are alleged representations made to investors in recent weeks by the management of Amaranth that may be contrary to apparent facts. Such claims -- if made -- would contradict the spirit and letter of current law. The facts about mammoth losses by Amaranth offer additional powerful and compelling evidence about the need to reform disclosure and oversight requirements."

In a separate action Tuesday, Blumenthal sent the Securities and Exchange Commission (SEC) a letter praising proposed changes to rein in so-called "naked short-selling," which refers to the illegal short selling of nonexistent shares. He called for even tougher measures against the practice, noting that some hedge funds -- among others -- have been accused of using "naked short selling" as part of a scheme to make large profits by artificially driving down a company's stock price.

"I strongly support the SEC's crackdown on this illegal practice by eliminating a rule that exempted smaller short sales from the requirement to quickly deliver stock," Blumenthal said. "The SEC should take even tougher steps to stop this dangerous and despicable practice. The rule should be simple commonsense: when you sell a product, you must deliver it. The SEC should require all stock sold short be delivered to its buyer within a reasonable time period with no exceptions or loopholes. Naked short selling victimizes honest companies and investors."

In the letter to the SEC, Blumenthal made sure to differentiate between "short selling and "naked short selling." He noted that short selling is a legal and common practice when investors bet that a stock's price will fall. They borrow shares of stock they believe will lose value and sell them. If the price falls, they buy back the shares -- making a profit because they purchased new shares at a lower price -- and return them to the original owner.

Blumenthal explained that naked short selling -- which is illegal -- is when investors short sell shares without borrowing them. The seller is therefore selling a share that does not exist. Problems arise when the stock "fails to deliver" -- the buyer of the nonexistent share never receives the actual shares of the stock he or she purchased.

Blumenthal became proactive on monitoring hedge funds in 2005 following the fraudulent activity from 1996-2005 of Stamford, CT-based Bayou Management, which resulted in the guilty pleas of two top managers there. The SEC's complaint alleged that the two managers defrauded investors in the funds and misappropriated millions of dollars in investor funds for their personal use.

In the wake of the Bayou scandal, the attorney general in 2005 endorsed SEC Chairman Christopher Cox's statement that he would support and implement requirements that hedge fund advisors register with the SEC.

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